Overcoming Fear and Greed – Circa 2017

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It seems everyone has an opinion about what is coming next which makes it difficult to tune out the noise and “predictions” of market pundits. But if there is one thing we have learned from the media, it is that no one seems to have a clue what is coming next. There is never a shortage of fear or greed driving investors in global markets in any year. Fear and greed are not new, but sometimes investors have a tough time recognizing their emotions and how they may be impacting critical investment decisions.

Just as the market can become overwhelmed with greed, the same can happen with fear. When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining even further losses. But being too fearful can be just as costly as being too greedy.

A mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals. Investors abandoned their plans because fear overran them. Granted, losing a large portion of your equity portfolio’s worth is a tough pill to swallow, but even harder to digest is the thought that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.

On the opposite end of the spectrum investors get caught up in greed. After all, most of us have a desire to acquire as much wealth as possible in the shortest amount of time.

This “get-rich-quick” mentality makes it hard to maintain gains and keep to a strict investment plan over the long term. This is especially difficult amid such a frenzy, or as the former Federal Reserve chairman, Alan Greenspan famously put it, the “irrational exuberance” of the overall market. It’s times like these when it is crucial to maintain an even keel and stick to the basics of investing, such as maintaining a long-term horizon.

All of this talk of fear and greed relates to the volatility inherent in the stock market. When investors lose their comfort level due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes.

Avoid getting swept up in the dominant market sentiment of the day, which can be driven by current events, and remember the fundamentals of investing. It is also important to choose a suitable asset allocation. For example, if you are an extremely risk averse person, you are likely to be more susceptible to being overrun by the fear dominating the market, and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.

Keep in mind this isn’t as easy as it sounds. There’s a fine line between controlling your emotions and being just plain stubborn. Many investors find regular meetings with a trusted advisor that has taken the time to get to know you and your family to be critical in staying on track.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

A Little Bird Told Me: When Twitter Moves Markets

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It’s hard to believe the impact a mere 140 characters can have on financial markets.

As demonstrated by now President Donald Trump, tweet-shaming packs a powerful punch. In the early morning hours of December 6, Trump tweeted that Boeing’s new Air Force One fleet project, at a cost of $4 billion, was “out of control.” When markets opened for trading several hours later, shares of the aviation contractor slid by 1%. Similarly, Trump’s Twitter tongue-lashing of aerospace contractor Lockheed Martin later in the month resulted in its stock closing down more than 2.4%. Both companies’ stocks recovered shortly after these incidents.

Calling out companies on Twitter isn’t a move reserved just for Republicans. During the 2016 presidential campaign, Democratic nominee Hillary Clinton also took to Twitter to criticize pharmaceutical firms Mylan NV (maker of the EpiPen) and Valeant Pharmaceuticals International, Inc., which both have been widely denounced for their price-gouging practices. Following Clinton’s social-media castigations, Mylan’s and Valeant’s stock prices immediately plunged 5.5% and almost 6%, respectively, before eventually recovering.

Tweets have been moving markets for years. In April 2013, Syrian hackers took over the Associated Press’ Twitter account and tweeted that (false) explosions at the White House had injured President Obama. Within three minutes, the S&P 500 lost $136 billion and the Dow Jones dropped nearly 1% before the AP’s corporate communications team used a separate Twitter account to identify the bogus tweet, reversing the sharp sell-off. In the interim, investors fled equities and sought safety in bond and currency markets; as a result, the 10-year Treasury yield plunged almost six basis points while the U.S. dollar temporarily fell before the fake tweet was disproved. Such is the strength of social media.

Trading on Tweets is for the Birds

Remember that many tweets are unfiltered and unedited, and anyone can post anything, regardless of accuracy (or veracity). Social media can be a great source of investment information, but it should not be used as the primary resource.

Know your investment objectives. We review this with all our clients, but it holds true for a good reason. Trying to time the market based on social-media postings is a losing proposition, and following the crowd is never a good investment strategy. Short-term market movements, while alarming, should not impact long-term investment planning.

As always, do not hesitate to contact us if you would like to talk more about your financial objectives.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

The Least Fun Way to Maximize Holiday Gifts

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My spouse is the first one to remind me why finance and accounting professionals, of which I’ve been both, take the fun out of everything.  Whether it’s keeping the books in balance or households and divisions under budget, we’ve been known to tend to say no to some of the fun decisions that our peers suggest.  While decisions without optimal financial results sometimes make life worth living and can be relatively harmless in moderation, allow me to indulge my finance habits and tell you the least fun way to spend all that paper and plastic slid into your holiday cards.

You may have already guessed where a financial planner would go with this.  Whether you choose to do it or not is likely not going to be meaningful in your overall financial picture, but it does happen to be a fun way to articulate the power of compounding in the financial markets.  So let’s get to the hypothetical example: You receive a total of $600 in an assortment of gift cards to your maybe-not-so-favorite stores.  Not only do you have extremely nice friends and family, but you now also have $600 of value.  Using gift card-for-cash websites may enable you to trade in that $600 stack of gift cards at a discount, which you could then invest the cash value. Hypothetically speaking, if you had a time machine and could travel back to 1982 to invest the $500 in the S&P 500 (comprised of 500 large cap domestic companies), in 2013 that $500 investment alone may have been worth $17,145.*

Sure, there are things like inflation and taxes that could factor into it as well as account fees if this time traveling investment plan ever did take place, but the idea does display fairly well how compounding investment returns, or letting money grow on itself, can make a big difference in one’s life.  Just as importantly, it also shows how the key variable to that compounding, Time, matters.  It’s a good example to show your children or grandchildren who are just now securing their first job out of school about why it’s important to not ignore retirement savings in the early years.  One may be able to make up for lost time through increasing contribution amounts in later employment years, but it’s a lot harder to make up for the lost time of not compounding investment return.

So, next time you get that gift card to your favorite electronic store and want to beef up your movie collection, you could always just cash it in and invest…but where’s the fun in that, right?

*Bankerate’s Way-Back Machine http://www.bankrate.com/finance/investing/historical-returns-investing-calculator.aspx

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Indices are unmanaged and do not incur fees. One cannot directly invest in an index. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Simple Definition of Fiduciary

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A fiduciary is obligated to give you advice that is in your best interest. Yeah….I know…..who wants advice that is not in their best interest? Sometimes in our lives we don’t want what’s in our best interest, but when you walk into the office of a Certified Financial Planner® you should not expect anything less than fiduciary care.

So when do we want something that is not in our best interest? When we visit a bar, lottery terminal, racino, donut shop, or even a discount broker. In our opinion, when you buy that hot stock online your odds are probably better than the lottery terminal, but not much. Moreover, as long as you answer a few questions correctly on your new account screen, your discount broker will let you buy that hot stock.

We feel consumers should be allowed to buy what they want, but true “professionals” cannot deliver whatever the customers want. Professionals deliver advice. It seems to us that the only kind of advice worth paying for is fiduciary advice, delivered in the best interests of the person receiving it.

If one is seeking advice about anything, we expect advice that is best for us. We are not seeking advice that could be harmful. My doctor does not prescribe any medication I request, my CPA does not let me use any idea I have to reduce my taxes, so why would I expect my Certified Financial Planner® to let me invest in something that has little chance of helping me reach my goals?

Fiduciary in the News

Those of us in the financial advice industry are witnessing some changes as it relates to being a fiduciary. In a nutshell the Department of Labor has released new sets of rules as they relate to giving advice to customers with IRA accounts. IRA accounts come under the purview of the Department of Labor because the DOL oversees the laws pertaining to IRA accounts. Like any new regulation, it is having some intended and some unintended impacts on our industry. A fair amount of confusion and misunderstanding surround the new rules, but that will be sorted out in time.

Even with these changes, the main point for the consumer is the difference between seeking advice from a fiduciary or buying something from a salesperson/online broker. If one wants advice seek out a professional adviser (preferably a Certified Financial Planner®). If you don’t want advice there will still be places that will indulge your purchase of that hot stock or fund.

The new fiduciary rules are a good start to help the public get better advice. However, it has been our experience (and probably yours) that just because a salesperson is told they are now a fiduciary, they don’t just change their thought processes and habits overnight. The evolution of a profession takes time.

How do you know if you are sitting in front of a fiduciary or a salesperson? Do they ask you a lot of questions, formulate a plan, and look at the big picture of your family’s finances? Or do they focus on what they want to sell you? The feeling in the pit of your stomach may be your best guide.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Your Financial Life Owner’s Manual: Ongoing Maintenance

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The book that sits in the glovebox of your car has the obligatory ‘Ongoing Maintenance’ section, highlighting how often you should be changing your oil, flushing your transmission fluid and a slew of other tune-up services.  However, no one probably gave you an ongoing maintenance guide to your financial life once your account balances started to go up.  Knowing what you have and when you should schedule a tune-up can protect you from wandering into a few common financial slip-ups as you charge toward achieving life’s goals.

Rebalancing Investment Portfolios – 1 to 4 times a year

The value of your investment portfolio, and its’ underlying holdings, changes for better or worse every market day.  We don’t advocate obsessing over the daily changes however your overall asset allocation can change in meaningful ways, particularly during volatile times.  As winners and losers emerge over time, the risk you are taking in your portfolio may inadvertently change without your realization. For example, in bullish stock markets like the US market has experienced since 2009, your allocation to stocks as a percentage of your overall portfolio may have substantially increased.  Without regular rebalancing to keep your risk in line, you may have been left with a much bigger allocation to stocks than you intended.  Many companies allow for you to select quarterly rebalancing, making it an automatic effort to ensure “risk creep” doesn’t happen.

Permanent Life Insurance In-force Illustrations – Every 2-4 years

When’s the last time you had the life insurance policy you bought in 1989 looked at?  Depending on the type, you may find that the market conditions (e.g., higher interest rates) which that policy was written under do not reflect today’s market. The cash value designed to sustain itself throughout your life in 1989, may now only get you to age 73.  It’s important to understand what you have and whether your premiums are on track to achieve the goals you set at policy purchase. Along those same lines – maybe your goals changed and the insurance premium you dish out every year is no longer the optimal use of that money?

Financial Plan Refresh – Annually

Life happens and circumstances, goals and people change. It’s important to dedicate the mental energy to reinforce the goals you’ve laid out in the plan developed with your finance professional.  Financial Plans are not “set and forget” arrangements.  Your financial professional needs good information from you to help you succeed.

Legal Documents and Estate Planning – Annually

It’s important to stay in touch with your legal documents and estate planning (e.g., wills, trusts, power of attorney), at least annually, to confirm that your intentions remain the same and your relationship with the people you’ve elected to play a role in those documents are unchanged.  It’s also important to regularly check the beneficiary designations on all your financial accounts. Account beneficiaries supersede a will, so you always want to remember that as you make changes to your legal documents you are also adjusting your beneficiaries at the investment company as needed.

Unlike the reminder light that flashes in your face every day when you are overdue for an oil change, overdue maintenance on your financial life may sometimes be less glaring. Working with a trusted advisor and Certified Financial Planner is a step in the right direction.

 

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Don’t Confuse Effort with Results

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It may be possible to do more damage to your financial future as a tinkering and impatient investor than by staying the course. The temptation to make tweaks to investments and move money around, especially when markets are particularly volatile, may be hard to resist. In our experience, periods of volatility are exactly when being a hands-on investor with a lot of technological access to your accounts may be particularly dangerous. Why? Because humans routinely make the wrong moves under duress. When the market drops, it is incredibly hard to tell when it is going to go back up. However, if you stay invested and keep your money in play, you are part of the recovery as soon as it occurs rather than missing a significant portion of the growth.

According to Peter Lynch “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” This is evidenced in his review of annualized returns & performance of a $10,000 investment in the S&P 500 from 12/31/93 – 12/31/2013 when some of the best days were missed. Fully invested, the investment grew over that time frame by 9.22%. That same investment having missed just 10 of the best market days only grew by 5.49%. Missing 30 of the best market days grew by only 0.91%. *

Doubt is natural. Even investors working with financial advisors that have created sound financial plans can wake up in a panic and second-guess their ideas. So what should the average investor do? Stay out of your own way and try to avoid a few common investor behaviors such as:

  • Failing to Diversify.  A diversified portfolio may help you ride out the ups and downs that are inevitable in all market types, decades and asset classes. Diversification may help protect you from the risk of losing your whole investment or failing to capitalize on your investment at all.
  • Getting Emotional. In our experience, succumbing to your emotions whether by fear or greed, is the fastest way to hurt your financial success in the market. As humans we are highly susceptible to groupthink and can quickly feed off the emotions of others. In doing so, emotional investors tend to buy high and sell low, the exact opposite of what successful investors strive to do.
  • Tinkering. Rebalancing your portfolio regularly is one thing; daily visiting your account to tinker with or buy & sell is another. Start thinking about the long-term, instead of trying to tinker and make judgement calls about what the market will do next – market timing isn’t reliable.

What are a few good investor behaviors?

  •  Keeping diversified portfolios
  • Understanding personal risk tolerance and holding investments accordingly
  • Avoiding groupthink/herd mentality
  • Ignoring emotional media reports & “hot picks” from the person next door
  • Selecting a long-term investing strategy rather than attempting to time-the-market
  • Asking for help from a trusted fiduciary

Taking notice of these good practices and actively working to avoid the bad ones may prove beneficial to your financial peace of mind.

*http://www.businessinsider.com/cost-of-missing-10-best-days-in-sp-500-2014-3

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Indices are unmanaged and do not incur fees. One cannot directly invest in an index. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

What You Know May Hurt You: Investment Biases

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We all bring our own biases from our life experiences to any decision, whether it’s our health, jobs, politics or our money. If your money biases are in the driver’s seat, they may have adverse effects on our wealth in the long run.

Here are some examples of common biases: In our experience, individual stock ownership by residents that live in close proximity to or work for a locally based corporation are often higher. Sometimes that may work out if the company is very successful and that is reflected in their stock price.  In other cases, owning local may work the other way. However, the perception that people living near or working for a corporate headquarters know more about the future direction of its stock price has the potential to be a very dangerous bias.  Many examples over the years illustrate this point.  Enron and the stock holders that lived near or worked for the company come to mind.

Another bias is that of home country. Though the US is the largest economy in the world, it is certainly not the only economy in the world that presents investment opportunity. Beyond investment opportunities that exist in other parts of the world, adding non US based companies also adds diversification to a portfolio that may help returns over the long run.*  In our opinion, we think some American investors forget the ability we have to “own” companies from the far reaches of the world through mutual funds and ETFs.

Sometimes our own work experiences cause us to take action on our personal investment choices. It seems the more success investors enjoy themselves and with their friends and family, the more willing they are to take on investment risk. The opposite seems to be true as well. Suffering through the loss of a job and being surrounded by poor economic conditions may lead many to feel the same is true for everyone, everywhere.

Finally, prolonged periods of low investment returns may also make it feel like that is the only logical long term view.  Many prognosticators see continued low returns for the future. ** They may be correct, obviously the future is truly unknowable. However, it may be important to keep in mind that over the past 15 years the US stock market has only returned approximately 3% on average, as opposed to its long term average of 10%. ***

The importance of recognizing personal biases may have a big impact on one’s success as an investor.  For most people, having a long term relationship with a financial planner who you trust to identify your biases may help you keep moving toward your goals, despite your biases.

*Vanguard. Global equities: Balancing home bias and diversification 2014

**Barron’s: Expect Five Years of Slow Growth, Tepid Returns 7/31/15

***Advisor Perspective. Doug Short January 2016

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Childcare Expenses: Budgeting for Today’s Family Unit

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Many studies have been published recently about the evolving structure of today’s American family.  Among the most interesting developments, we continue to see an increasing proportion of dual-income and single parent families*.  Though some studies attempt to address the psychological aspects of these family structures, a stark reality facing families today are the financial implications.  As the Wall Street Journal published earlier this month, the total cost to raise a child for a middle-income family is now estimated to be $245,340 from birth to age 18. A leading contributor to the rapid increase is a spike in child-care expenses, which have outpaced inflation 2-to-1 since 2009.  Child-care costs have moved near the top of the household expense report and now rank as the second largest child-rearing expense (18% of total child-rearing costs) behind housing.  This, compared with child-care representing only 2% of a household’s budget in 1960**.  As the structure of the family unit evolves, many families find themselves leaning more than they may have anticipated on grandparents to help cover those costs and to assist both physically (in a child-care capacity) and/or financially.  Here are some considerations to ponder, both as parents and grandparents, on this topic:

For Younger Families: It’s more about awareness than prevention.  If you’re one of the many in a situation where childcare is the magician that makes your checking account balance vanish, you may not have many options to change that reality.  It is, however, important to stay in tune with your decisions and consider their implications.  Those cute children have a way of blinding parents from the long term implications of decisions, such as sending your child to private primary schooling vs. public schooling.  The right answer is a value judgment unique to each family, but you should go into those decisions with your eyes open to understanding what child-care and education expenses, particularly discretionary ones, do to your retirement and other life goals.  You should also be sure you’re optimizing childcare expenses to the best of your ability.  Be aware of the various tax benefits such as the child tax credit, and the possible availability of a Dependent Care FSA through your employer, which allows for pre-tax direct deductions from your paycheck to go toward qualified childcare expenses.

For the Grandparents: If you work with a financial planner, you likely sat down at one point to think through what your spending needs in retirement would be.  In many cases, that was 2 or 3 grandchildren ago, and quite possibly under a lower expectation of involvement.  Spending in retirement is often one of the biggest levers to the success or failure of your financial plan, so it’s crucial to revisit those needs, and your overall plan in general, on a regular basis.  Holiday/birthday gifts, 529 contributions and dinner bills have a way of sneaking into your checkbook in meaningful ways.

In both cases, creating and reviewing household budgets are very low on the list of fun things to do with your Sunday morning, but the nature of child-rearing expenses lend themselves to budget creep.  Keep your eye on it and consult with your Certified Financial Planner as life changes occur.

*Pew Research Center analysis of the Decennial Census and ACS IPUMS files, 6/18/15
**Wall Street Journal, ‘Soaring Child-Care Costs Squeeze Families’ 7/1/16
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

 

Long-term Investing: The Destination is Better than the Journey

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English Economist John Maynard Keynes famously compared financial markets to a strange sort of beauty pageant run by London newspapers in his time. The papers published an array of photos, and readers could enter a contest in which the winner was the reader who guessed which faces would be chosen by the most other participants. As Keynes pointed out, it would not do to simply choose the photo that one found most attractive, for one’s own tastes might not match those of other entrants. Neither, however, should one choose the photo that one thought other entrants would find most attractive (for they would not themselves be choosing the one they found most attractive). Each entrant would, rather, be trying to guess what other entrants would guess about which photos most other entrants would choose.

In the same way, participants in the stock market, Keynes argued, did not generally attempt to estimate the likely returns from a company’s investments (often referred to these days as its “fundamentals”), but to “guess better than the crowd how the crowd will behave.” If other market participants are, for whatever reason, buying a particular kind of asset and driving up its price, rational participants would decide to buy as well (to benefit from the short-run increase in prices) as long as they expected that the price would continue to rise. *

This makes sense, from the standpoint of an individual buyer, even if the buyer, in some sense, knows better— that is, believes that the company in question has bad long-term prospects, that “the market” has overpriced the stock that other buyers are acting unwisely, and so on. For example, I may not think that Springfield Nuclear Power is a very well-run company, but as long as I think other people are (unwisely) going to buy its stock, pushing up the stock price, it makes sense for me to buy the stock and profit from these future price increases. As more people buy in to take advantage of a crowd-induced rise in prices, of course, they further fuel the growth of the bubble. These price increases, in turn, may induce still others to buy the stock in anticipation of further increases, and so on.

This process can dramatically unhitch the price of an asset from its “fundamentals,” at least for a time. However, in the long run fundamentals matter both on the company and global economic levels. That’s what makes the investing “Journey” so challenging for so many. The ability to not react to news that moves the market on a short term basis is key to reaching your destination.

*New York Times 9/3/2011
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Knowing Your Investment Risk is as Crucial as Knowing Your Return

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Many retirees rely on their investments to generate part of the income that funds their lifestyle. Like Social Security, this portfolio income must be sustainable throughout their retirement and gradually increase over time to offset inflation. This is true even though most retirees usually have some flexibility in their yearly wants and needs and retirement spending tends to increase more slowly than overall inflation.

These ongoing withdrawals are best expressed as a percentage of the portfolio’s value; this is the withdrawal rate. Understandably, retirees want their withdrawal rate to be safe and sustainable. Here’s the risk: Their asset allocation may not be appropriate for the withdrawal rate they are asking their portfolio to sustain. And by the time they discover this, their lifestyle’s sustainability may be past its tipping point unless they make significant, and usually unwelcome, changes.

An analogy may help.

Think of your retirement income plan as a financial road trip to the end of your life with your desired lifestyle as the vehicle. Your portfolio’s size is the fuel in the tank, its performance is the engine’s output and your desired withdrawal rate is the desired speed. You likely have two goals for this journey: 1) Enjoy the ride; and 2) Arrive safely.

Of course, if the trip is too turbulent, enjoyment will suffer. However, if you don’t have enough fuel or the proper octane level for your desired speed, you won’t like it either. If the octane level is too high, you risk damaging the engine and leaving yourself stranded. If it’s too low, your speed may be too slow to enjoy the ride, or you may not reach your destination before running out of fuel. The octane level is your portfolio’s allocation to equities. If it is either too high or too low, it could be inappropriate to sustain the withdrawal rate you need for your desired lifestyle.

If you only think of risk as the short-term volatility of your investments, you aren’t considering the whole map of your financial journey. Given the withdrawal rate your desired income requires, your portfolio’s equity level may be either too high or too low. It’d be like the car breaking down just a few exits from your destination, or completely missing the exit and not noticing until you hit the border.

Either situation is a mistake that could put your retirement journey itself at risk. Therefore, having tools to measure risk are necessary. The best known risk measures include: Alpha, Beta, Standard Deviation, and Sharpe Ratio. Many popular services like Morningstar, Bloomberg, and Yahoo Finance can provide this data for mutual funds/portfolios. However, it does take some study to understand the significance of each measure. Certified Financial Planners (CFP’s) are trained to understand these measures.

Another method to help investors understand if their risk is appropriate would be good financial planning software. Some of today’s planning software can assess the statistical probability of your portfolio meeting your goals. The likelihood of not running out of money or leaving a certain inheritance can be determined. So just like having a trusted mechanic to keep your car driving safely, a qualified financial planner may help you reach your goals securely.

The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.